A Lower Risk Way to Play Defense: Part II

We follow up on last week's post A Lower Risk Way to Play Defense. In that piece, we highlighted the fact that stocks with high long-term momentum that have recently had a period of consolidation or weakness tend to outperform stocks with poor long-term momentum that have recently had a period of strength. We demonstrated that this is especially true during bear markets. Obviously, we are not in a bear market, but if one is looking to start building a defensive portfolio, it would, nevertheless, make sense to implement the strategy. Normally we don't highlight the reasons "why" a strategy works, but instead let the market tell us "what" is working. We are interested in making money, not in becoming tenured professors. But... if one insists on finding a reason, one might realize that stocks that have performed well over the last year tend to be higher "quality" companies. Buying such companies after a period of weakness or consolidation becomes even more alluring when investors emphasize investment quality during a choppy or declining market environment.

The stocks listed as buys all rank in the top quintile based on this price momentum factor (12 month return minus 3 month return minus 3 times last month's return). The stocks listed as shorts are in the corresponding bottom quintile.

Short idea:

ASEI - A breakdown that is currently revisiting prior support at the '12 and '14 lows. Wait for the stock to reject those lows as new resistance, and short as it begins heading lower again.

Long ideas:

INUV - A new value zone has clearly been established and re-tested above the tops at $3. Therefore, the stock appears to have asymmetric risk to the upside:

VUZI - Ditto for this stock. The new value zone appears to offer at least $10.